A Primer on the Costs of Noncompliance for U.S. Taxpayers with Foreign Operations

Since the decline in the economy stemming from the Great Recession, there has been continuous Congressional opposition to raising taxes. As a result, the
Internal Revenue Service is left in the position of trying to increase revenue for a government in need of funding without a corresponding increase
in tax rates.

What does this mean for multinational and other U.S. taxpayers with foreign bank accounts? The IRS has focused on increasing revenue through the aggressive
imposition of penalties for U.S. tax payers who have failed to properly report foreign financial accounts. Obtaining abatement of any penalties, even
for “reasonable cause” and/or “no willful neglect,” can be an extremely time-consuming, costly and frustrating process. Taxpayers can avoid the imposition
of penalties by being diligent, prepared and filing timely. While this summary will focus primarily on monetary penalties, penalties imposed by the
IRS can also include the forfeiture of property and even imprisonment.

One of the most significant opportunities for increasing the government coffers is through the strict application of U.S. tax law to the international
activities of U.S. taxpayers. For example, the IRS continues to keep open the modified (to include Streamlined option) 2012 Offshore Voluntary Disclosure
Initiative, to allow U.S. taxpayers to become compliant with reporting their foreign financial accounts. This program was tabbed as the “last best
chance” for U.S. taxpayers to avoid excessive penalties and jail time for nondisclosure of foreign bank accounts.

The penalties related to noncompliance with foreign disclosure requirements generally begin at US$10,000 per form not filed. These forms do not necessarily
result in additional U.S. taxable income or income tax, but are required to report foreign transactions and activities such as ownership of a foreign
subsidiary, a foreign partnership, a foreign disregarded entity, or a foreign financial asset. Penalties are also imposed for failure to report transactions
with related entities if the U.S. entity’s ownership is more than 25% foreign. In addition to the US $10,000 per form penalty, failure to file disclosure
forms may also result in the loss of foreign tax credits, which, if lost, could adversely impact a U.S. taxpayer’s federal tax due.

Unreported transfers to foreign corporations can result in penalties of 10% of the value of the transfers up to US $100,000 per transfer, and failure to
furnish information related to foreign trusts or gifts can result in penalties of up to 35% of the fair market value of trust assets or the foreign
gifts. Penalties also apply for non-reporting of treaty-based positions, as well as transacting business with designated “boycott” countries. Finally,
the Treasury regulations require that transactions with related parties should be undertaken on an “arm’s length basis.” Should the IRS determine that
an appropriate transfer price was not utilized, or that proper documentation of that transfer price was not maintained, the penalty is 20% to 40% of
the understatement of tax, based upon using the incorrect transfer price.

In some cases, willful neglect resulting in a failure to file a return can also carry the threat of criminal prosecution, in addition to monetary penalties.
Willful neglect generally involves a conscious, intentional failure or reckless indifference. That said, there is much uncertainty around the application
of what constitutes willful neglect.

The best defense against penalties is not only a good offense, but common sense, along with a clear understanding of the rules and regulations, appropriate
disclosure of transactions, and timely filing of all returns. Not doing so can result in unnecessary and costly penalties and, in many cases, the statute
of limitations on the entire U.S. tax return remaining open until such required information returns have been filed.

The table on the following page summarizes some of the key U.S. information returns required for foreign activities, along with the related applicable
penalties.

FORM

REQUIRED BY

PENALTY

STANDARD

5471

IRC 6046(a)

IRC 6679(a) $10,000 with an additional $10,000 added for each month beginning 90 days after notfied of the delinquency Maximum of $50,000 per
return Potential reduction of the foreign tax credit available

Reasonable cause

5472

IRC 6038A

IRC 6038A(d) $10,000 penalty per required form May increase to $10,000 per month per form for continued failure to file

Reasonable cause

8865

IRC 6046A

IRC 6679(a) $10,000 with an additional $10,000 added for each month beginning 90 days after notified of the delinquency Maximum of $50,000 per
return Penalty also includes 10% of the value of any transferred property that is not reported, up to a maximum of $100,000

Reasonable cause

8858

IRC 6038(a)

IRC 6679(a) $10,000 with an additional $10,000 added for each month beginning 90 days after notified of the delinquency Maximum of $50,000 per
return Potential reduction of the foreign tax credit available

Reasonable cause

926

IRC 6038B

IRC 6038B(c) 10% of the value of the transfer, up to $100,000

Reasonable cause PLUS
no willful neglect

8621

IRC 6038

IRC Section 6038D(d) $10,000 per failure to furnish information if required to be reported on Form 8938

Reasonable cause PLUS
no willful neglect

8938

IRC 6038D

IRC 6038D(g) $10,000 per failure to furnish information After 90 days, additional $10,000 for each 30 days period Maximum of $50,000 per return

Reasonable cause PLUS
no willful neglect

3520

IRC 6048

IRC 6677 Trust – Penalties are the greater of $10,000, or 35% of the gross reportable amount Gift - Penalty is 5% of the value of the gift
per month up to a maximum of 25% of the value of the gift

Reasonable cause PLUS
no willful neglect

3520-A

IRC 6048

IRC 6677 Penalties are the greater of $10,000, or 5% of the gross value of the trust assets determined to be owned by the U.S. person

Reasonable cause PLUS
no willful neglect

FBAR
FinCEN 114
(FKA TD F 90-22.1)

31 USC 5314

31 USC 5321(a)(5)(B)(i) Non-willful – up to $10,000 per account per year Willlful – Higher of $100,000 or 50% of the total balance of the foreign financial
account per violation